Estimate the medical/adoption costs associated with gaining a child.
Take some time to understand what costs your health insurance and employer benefits will cover.
If you don’t have insurance, explore whether you can qualify for Medicaid or the Children’s Health Insurance Program (CHIP), or you can purchase a marketplace plan at healthcare.gov.
Then estimate how much you’ll have to pay out of pocket for gaining a child.
Estimate any one-time expenses associated with making space for a growing family.
Consider whether you need to move or make upgrades to your home, buy a vehicle with more space, get furniture such as a crib/bassinet or changing table, or purchase equipment like a car seat and stroller.
Plan to take time off work (recover from birth, support your partner, bond with your child).
Common options to help you take time off work include:
- Paid time off (such as sick and vacation time)
- Paid family leave
- Short-term disability insurance
- Family Medical and Leave Act (FMLA) time
- Unpaid leave
Additionally, some states require employers to provide family leave.
Many families use a combination of benefits, such as combining short-term disability with FMLA leave or staggering the leave of dual-income partners to keep the baby home longer. What’s available and how the options coordinate vary by employer. Make sure you understand how much leave is available, how much you’ll be paid, and whether your job is protected.
Determine how you’ll cover these costs.
Explore whether you’re eligible to save in a Health Savings Account (HSA) or Flexible Spending Account (FSA) to cover qualified medical expenses.
If you have some time to prepare, start saving by allocating any excess income or cash to your baby fund, and adjusting your spending if necessary.
If you have a shortfall, your financial advisor can help walk you through some trade-offs of other sources of funds, such as tapping into a retirement account or borrowing money.
Review your insurance and adjust where needed.
Life insurance*
You may need more life insurance to cover a larger family. Your financial advisor can help determine an amount and type of life insurance that make the most sense for you. Many families need only term insurance (which is more affordable), but permanent insurance can make more sense for some situations.
Disability insurance*
Having disability coverage becomes more important if you have a family to support. Make sure you have strategies in place to protect your income against both a short-term and a long-term disability.
Create or review your estate plan.
An estate plan helps ensure your children have the care you would want them to receive if anything were to happen to you. You can do this anytime, but because time becomes scarcer after a new child joins the family, it’s helpful to at least start this before your new addition arrives. An estate-planning attorney can help with this.
Determine how you’ll address the need for child care.
While some aspects of your budget may be hard to predict until your newest addition arrives, child care is an area you should start figuring out immediately. Start by talking about the kind of care you want.
If relying on family or friends, you’ll want to understand their availability and whether you’ll need to supplement with other kinds of care.
If someone is reducing paid work, start thinking about adjusting for the loss of income. Your financial advisor can run the numbers to illustrate the financial impact.
If you plan to use paid caregiving, start looking into options well before you need it. Many areas have a shortage of child-care options, resulting in long waitlists and high prices. Starting early can expand your available choices and help you factor the cost into your budget.
Incorporate other ongoing costs and look for opportunities to cut spending.
Children come with ongoing expenses that change over time. As one expense rolls off, another tends to start or increase. Make sure you have room in your budget for these expenses.
Because your child-related expenses will rise, you may want to look for opportunities to reduce your spending elsewhere. You may find savings naturally as your day-to-day financial priorities shift.
Adjust your emergency fund based on your new family size and budget needs.
We generally recommend saving three to six months’ worth of total expenses in your emergency fund. It will likely need to grow for two reasons:
- Your monthly expenses will likely increase with a growing family. When your expenses increase, your emergency fund will need to keep pace.
- With a growing family, you may want to err on the higher side of that range. More people in your family means a higher likelihood of unexpected expenses.
Enroll your child in health insurance.
It’s important that your child have health insurance if at all possible, whether that’s through an employer plan, a marketplace plan, Medicaid or the Children’s Health Insurance Program (CHIP). For coverage that becomes effective at birth/adoption, some of these require enrollment within 30 or 60 days of your child being born, so don’t delay signing up.
Consider the use of a dependent care FSA (DCFSA) if one is available.
Some employers offer a DCFSA, which allows you to use pretax dollars from your paycheck to save up to $5,000 per year ($2,500 if married filing separately) for use on qualified dependent care expenses. Keep in mind these funds are “use it or lose it,” and once you select an amount to contribute, you generally can’t change it for that benefit period. Estimate carefully so you don’t end up with unused amounts.
Consider adjusting your group life insurance coverage.
A special enrollment period through your employer may allow you to increase your group life insurance. Your employer may also allow you to insure your spouse/partner and child.
Determine whether you should update your tax withholding on your W4.
You can update your W4 to add dependents, which will generally lower your tax withholding and increase your take-home pay. If you’re part of a dual-income household, you may want to consult with a tax professional or use the IRS Tax Withholding Estimator first to avoid a surprise tax bill next tax season.
Determine whether you qualify for tax credits/deductions.
Work with your tax professional to determine whether you qualify for any credits or deductions related to your growing family. Ask about the child and dependent care credit, the federal child tax credit and adoption-related credits (if you adopted).
Revisit your financial goals.
There’s nothing quite like having a child to change your needs, wants and wishes. A financial advisor can work with you to revisit your financial goals to make sure your spending and saving are aligned with your family’s values. And if you have a partner, open and frequent communication is key to staying on the same page, so you’re working together toward your goals.
Start thinking about education costs.
College may seem far away, but time is your friend when it comes to saving. Additionally, some education savings accounts can be used for K-12 expenses if you’re interested in private school. Your financial advisor can help estimate costs, explore your options for saving for education and determine the best way to work the savings into your budget.